Loading judgment…
Facts
The assessee, a Cooperative Society, claimed deduction under Section 80P(2)(a)(i) for interest income. The Assessing Officer (AO) initially disallowed part of the deduction related to interest from cooperative banks but allowed proportionate expenses. The Principal Commissioner of Income Tax (PCIT) invoked Section 263, holding the AO's order erroneous and prejudicial to revenue, and set aside the assessment for further inquiry.
Held
The Tribunal held that the AO conducted a detailed inquiry and took a permissible view by allowing proportionate expenses. It noted that similar issues have been decided in favour of the assessee by coordinate benches, holding that interest earned from cooperative banks is eligible for deduction under Section 80P(2)(d). The Tribunal quashed the PCIT's order under Section 263.
Key Issues
Whether the PCIT was justified in invoking Section 263 to revise the assessment order regarding the allowability of deduction for interest income earned from cooperative banks and proportionate expenses?
Sections Cited
263, 143(3), 144B, 80P, 80P(2)(a)(i), 80P(2)(d), 56, 57, 270A, 143(2), 142(1), 144A, 120
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, PUNE BENCHES “B”, PUNE
Before: DR.MANISH BORAD & SHRI VINAY BHAMORE
आदेश / ORDER
PER DR. MANISH BORAD, ACCOUNTANT MEMBER :
The captioned appeal at the instance of assessee pertaining to A.Y. 2021-22 is directed against the order of ld. Principal Commissioner of Income Tax (PCIT), Pune-3 arising out of Assessment Order dated 02.12.2022 passed u/s.143(3) r.w.s.144B of the Income-tax Act, 1961 (hereinafter also called ‘the Act’).
Assessee has raised following grounds of appeal : “1) On the facts and in the circumstances of the case and in law the Ld. Pr. CIT-Pune-3, Pune wrongly assumed the jurisdiction under S. 263 of the Act as the issue is not only highly debatable but the same has been decided in favour of the assessee by various judicial verdicts of High Court including the Jurisdictional Bombay High Court and various Benches of Tribunals including the Jurisdictional Pune Bench. Since the assumption of jurisdiction is illegal and without jurisdiction the order passed by the Ld. Pr. CIT-3, Pune u/s 263 be cancelled.
2) On the facts and in the circumstances of the case and in law the quite elaborate submissions were made before Pr. CIT-3, Pune in response to the show-cause notice u/s 263 of the Act, pointing out that one of the plausible views was taken by the A.O. which was sustainable in law. The Ld. Pr. CIT-3 himself admitted in his order under S. 263 that various contrary contentions are available. In such circumstances and since the issue was highly debatable the same was beyond the purview of the Revisional Powers of the Ld. Pr. CIT under S. 263 of the Act. The action taken u/s 263 to set aside the order of assessment be cancelled.
3) On the facts and in the circumstances of the case and in law the Ld. Pr. CIT-3 was supposed to pass a final order under S. 263 and not simply set aside the assessment to the file of the A.O. for framing the assessment afresh. The action of the Ld. Pr. CIT taken under S. 263 is illegal and be not sustained as it is not sustainable in law. It be set aside.
4) On the facts and in the circumstances of the case and in law the Ld. Pr. CIT-3, Pune also was not justified in setting aside the order of the A.Ο. holding it as erroneous and prejudicial to the interests of revenue because A.O. had not examined and allowed the deduction u/s 80P(2)(a)(i)/80P(2) (d) of the Act as it is outside the scope of S. 80P on the contrary the order passed by the Ld. A.O. is erroneous and prejudicial to the interest of the assessee, and hence appeal is filed by the assessee to the Hon'ble CIT (A) NFAC on 24-01-2023 which is pending, and hence the action of the Pr. CIT-3-Pune is not justified.
5) On the facts and in the circumstances of the case and in law appellants reserves his right to raise any legal ground at the time of hearing.
6) The appellant craves to leave, add/amend or alter any of the above grounds of appeal.”
Brief facts of the case are that the assessee is a Cooperative Society and furnished e-return for A.Y. 2021-22 on 12.01.2022 declaring Nil income. Case selected for scrutiny under CASS followed by validly serving of notices u/s.143(2)/142(1) of the Act. The assessee which is a Cooperative Society registered under the Maharashtra Cooperative Societies Act, 1960 is engaged in providing credit facilities to its Members. Ld. Assessing Officer noticed that assessee has claimed deduction u/s.80P(2)(a)(i) of the Act at Rs.1,14,64,935/- which includes sum of Rs.30,72697/- being the interest income from investments made with Pune District Central Cooperative Bank Ltd. (PDCC). Ld. AO after examining the record firstly came to conclusion that assessee is not entitled to deduction u/s.80P(2)(d) of the Act for the interest income of Rs.30,72,697/-. Subsequently, assessee asked for allowing the expenses incurred for earning the alleged interest income from Cooperative Banks. Ld. AO taking the basis of total Revenue to the interest on investment calculated the percentage at 6.7% and after applying the same on the deduction claimed by the assessee u/s.80P of the Act disallowed Rs.7,68,150/- and concluded the assessment.
4. Subsequently, ld. PCIT examined the assessment record and under the provisions of section 263 of the Act issued a show cause notice to the assessee on 18.02.2025 and main issues raised therein is that (1) assessee is not entitled for deduction u/s.80P(2)(d) of the Act for the interest income from investments from Cooperative Banks; (2) Ld. AO has erred in allowing the proportionate expenditure; (3) Ld. AO ought to have verified the actual quantum of expenditure incurred for earning the interest income rather than allowing on proportionate basis; (4) Ld. AO was duty bound to determine by conducting specific enquiry as to whether any expenditure was incurred in earning the interest income. Assessee in reply to show cause notice stated that ld. AO has examined the issue in detail and during the assessment proceedings ld. AO firstly asked the assessee how the claim u/s.80P(2)(d) can be allowed and thereafter without allowing the deduction u/s.80P(2)(d) of the Act has only allowed the proportionate expenditure incurred for earning the interest income because the assessee borrowed the funds from the Members and applied the same for making investment with Cooperative Banks and therefore such expenditure including other indirect expenditure has been rightly allowed by ld. AO on proportionate basis. He further submitted that the additions made by ld. AO has been further appealed by the assessee before ld.CIT(A) which is still pending for adjudication. However, ld. PCIT was not satisfied with these submissions and he observed that the order of the AO is erroneous in so far as it is prejudicial to the interest of Revenue and had partly set-aside to the file of AO for the limited purpose of examining the following issues :
“i) The A.O shall examine the eligibility of deduction available to the assessee u/s.80P(2)(a) of the Act in the light of decision of the Hon'ble Supreme Court in the case of Totgars Co-operative Sales Society Ltd. Vs. ITO, (SC) (322 ITR 283)(2010). ii) The A.O shall also examine whether any expenditure was incurred by the assessee for earning the interest income and recompute the business income by treating the whole of such interest receipts as 'Income from other sources'. iii) The AO shall examine whether the assessee is ineligible for deduction u/s 80P in view of specific provision of section 80P(2)(d) rws section 80P (4) of the Act in respect of interest income taxable u/s.56 of the Act.
The Assessing Officer is directed to give adequate opportunity of being heard to the assessee before passing the fresh assessment order.”
Aggrieved assessee is now in appeal before this Tribunal.
Ld. Counsel for the assessee has again reiterated the submissions made before ld.CIT(A) along with making a reference to the detailed written submissions filed on record.
On the other hand, ld. Departmental Representative supported the order of ld.PCIT.
We have heard the rival contentions and perused the record placed before us. We find that the provision of Section 263 of the Act has direct bearing on the issue raised before us, therefore, it is pertinent to take note of this section which reads as under:
"263(1) The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
Explanation- For the removal of doubts, it is hereby declared that, for the purposes of this sub-section,- (a) an order passed on or before or after the 1st day of June, 1988 by the Assessing Officer shall include- (i) an order of assessment made by the Assistant Commissioner or Deputy Commissioner or the Income-tax Officer on the basis of the directions issued by the Joint Commissioner under section 144A; (ii) an order made by the Joint Commissioner in exercise of the powers or in the performance of the functions of an Assessing Officer conferred on, or assigned to, him under the orders or directions issued by the Board or by the Chief Commissioner or Director General or Commissioner authorized by the Board in this behalf under section 120; (b) record shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the Commissioner; (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal.
(2) No order shall be made under sub-section (1) after the expiry of two years from the end of the financial year in which the order sought to be revised was passed.
(3) Notwithstanding anything contained in sub-section (2), an order in revision under this section may be passed at any time in the case of an order which has been passed in consequence of, or to give effect to, any finding or direction contained in an order of the Appellate Tribunal, National Tax Tribunal, the High Court or the Supreme Court. Explanation- In computing the period of limitation for the purposes of sub-section (2), the time taken in giving an opportunity to the assessee to be reheard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded." 8.1. On a bare perusal of the sub section-1 would reveal that powers of revision granted by section 263 to the learned Commissioner have four compartments. In the first place, the learned Commissioner may call for and examine the records of any proceedings under this Act. For calling of the record and examination, the learned Commissioner was not required to show any reason. It is a part of his administrative control to call for the records and examine them. The second feature would come when he will judge an order passed by an Assessing Officer on culmination of any proceedings or during the pendency of those proceedings. On an analysis of the record and of the order passed by the Assessing Officer, he formed an opinion that such an order is erroneous in so far as it is prejudicial to the interests of the Revenue. By this stage the learned Commissioner was not required the assistance of the assessee. Thereafter the third stage would come. The learned Commissioner would issue a show cause notice pointing out the reasons for the formation of his belief that action u/s 263 is required on a particular order of the Assessing Officer. At this stage the opportunity to the assessee would be given. The learned Commissioner has to conduct an inquiry as he may deem fit. After hearing the assessee, he will pass the order. This is the 4th compartment of this section. The learned Commissioner may annul the order of the Assessing Officer. He may enhance the assessed income by modifying the order. He may set aside the order and direct the Assessing Officer to pass a fresh order. At this stage, before considering the multi- fold contentions of the ld. Representatives, we deem it pertinent to take note of the fundamental tests propounded in various judgments relevant for judging the action of the CIT taken u/s 263.
8.2. Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC) has laid down following ratio with regard to provisions of section 263 of the Act:
There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the revenue’ has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue - RampyariDevi Saraogi v. CIT [1968] 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC). [Emphasis Supplied]
9. On examining the facts of the instant case in light of above judicial precedents, we notice that assessee has made claim for deduction u/s.80P(2)(d) of the Act for the interest income earned from providing credit facilities to its Members. Ld. AO while examining this claim noticed that in the profit and loss account assessee has shown interest income from investments made with PDCC Bank at Rs.30,72,697/-. During the course of assessment proceedings itself, ld. AO confronted the assessee with the said claim observing that deduction u/s.80P(2)(d) of the Act is allowable only for the interest earned from Cooperative Societies and not Cooperative Banks. Though the assessee has furnished various decisions of this Tribunal in support of its claim but ld. AO has not accepted. Considering the situation, assessee requested ld. AO to atleast grant the claim of proportionate expenditure incurred for earning the interest income. Ld. AO found merit in the said request of the assessee and taking the total Revenue as the basis, calculated the disallowance @6.7% in the following manner :
“4.6 Conclusion drawn :
In view of the above facts, the interest income of Rs.30,72,697/- interest on fixed deposits with Cooperative banks claimed as deduction u/s 80P(2)(a)(i)/80P(2)(d of the Act is outside the ambit and scope of Section 80P. Having regard to the contention of the assessee in para 7 of its reply received on 5.11.22 that – 7. Alternatively, if interest income is be assessed as "income from other sources", however deduction u/s.57 is to be given in respect of expenditure for earning interest income. The amount of disallowance out of interest income is however subject to deduction of the amount permissible u/s 57 of the Act. No details of expenses are specifically provided by assessee. Therefore the proportion the interest income from investments in the total revenue is taken as the basis for computing the disallowance out of total 80P deduction and added back under the head income from other sources u/s 56 of the Income Tax Act, 1961. The disallowance will be recomputed as under :-
1. Total Revenue Rs.4,29,98,030/- 2. Interest on Investment Rs.30,72,697/- 3. Total Rs.4,60,70,727/
Interest on Investment of 6.7% Rs.30,72,697/- to Total revenue of Rs.4,60,70,727/-0 5. Total deduction u/s.80P claimed by the Rs.114,64,984/- assessee 6. Total disallowance u/s.56 (11464984 x Rs.7,68,150/- 6.7%)
Total disallowance of Rs.7,68,150/- I am satisfied that the assessee has under-reported the income therefore the penalty u/s.270A of the Income Tax Act, 1961 will be initiated separately for under reporting of income. 5. Table of variations :
Sl.No. Description Amount (in INR) 1. Income as per Return of Income filed Nil 2. Income as computed u/s.143(1)(a) 3. Disallowance u/s.56 Rs.7,68,150/- 4. Variation in respect of issue of <>(if any 5. Total Income/Loss determined as per Rs.7,68,150/- the above proposal
From the above observations of the AO, we find that ld. AO had conducted a detailed enquiry on the issue of deduction claimed u/s.80P of the Act by the assessee. Ld. PCIT has only referred to the claim u/s.80P(2)(d) of the Act. Ld. AO has examined the issue exhaustively and took one of the permissible views by allowing the proportionate expenses. Ld. PCIT has also raised question on the method of calculating the proportionate disallowance but this method followed by ld. AO is also one of the correct method for calculating such disallowance. Even otherwise, practically, it is not possible to examine each and every indirect expenditure incurred by the assessee during the year to calculate the expenses actually incurred for earning the interest income from investments with Cooperative Banks. We also note that this Tribunal has consistently held that even the interest earned from Cooperative Banks is also eligible for deduction u/s.80P(2)(d) of the Act.
Recently, this Tribunal in the case of Annapurna Nagari Sahkari Pathsanstha Maryadit Yawal in order dated 24.03.2025 has decided the very same issue in favour of the assessee observing as follows :
“7. We have heard both the sides and perused the record placed before us. In the instant case, the Assessing Officer disallowed the interest income of Rs.1,63,98,998/- earned out of the Fixed deposits/Investments made with Cooperative Banks treating the same as Income from Other Source. Ld.CIT(A) dismissed the appeal in limine without discussing anything on merits of the issues and on the ground that the assessee has not provided plausible explanation for admission of additional evidences.
8. Section 80P(2)(d) of the Act provides that the sum received in respect of any income by way of interest or dividend derived by Cooperative Society from its investment with any other Cooperative Society, the whole of such income is eligible for deduction u/s.80P of the Act. we find that this issue is no more res integra as the Coordinate Benches of this Tribunal has been consistently holding that the interest income earned out of the FDs/Investments kept with Cooperative Banks is allowable u/s.80P(2)(d) of the Act. We find that this Tribunal in case of Kolhapur District Central Co-op. Bank Kanista Sevakanchi Sahakar Pat Sanstha Ltd., Vs. ITO in dated 01.01.2024 dealing with similar issue after placing reliance on another decision of this Tribunal in the case of The Ugar Sugar Works Kamgar & Dr. Shirgaokar Shaikshanik Trust Nokar Co-op Credit Society vs. ITO in dated 27.05.2022 has held that the interest earned from deposits with Cooperative Banks are also eligible for deduction u/s.80P(2)(d) of the Act as Cooperative Banks are basically Cooperative Societies only but have turned into Bank on getting necessary banking license.
Respectfully following the above referred decisions taking consistent view along with considering the facts of the case, where the assessee made investment with the Cooperative Banks we hold that the assessee is eligible for deduction u/s.80P(2)(d) of the Act for the interest income earned from Cooperative Banks at Rs.1,63,98,998/-. Findings of the ld. CIT(A) is set-aside and the Assessing Officer is directed to allow the claim made by the assessee. Effective grounds of appeal raised by the assessee are allowed.”
Under all these given facts and circumstances, we find that ld. AO has conducted detailed enquiry on all the issues referred by ld. PCIT in the show cause notice issued u/s.263 of the Act and after proper application of mind has taken one of the view legally permissible and concluded the assessment. We therefore find that the assessment order dated for A.Y. 2021-22 is neither erroneous nor prejudicial to the interest of Revenue. Impugned finding given by ld. PCIT is set-aside and the order u/s.263 is hereby quashed and the assessment order dated 02.12.2022 is restored to its original place. Grounds of appeal raised by the assessee are allowed.
In the result, appeal of the assessee is allowed.
Order pronounced on this 23rd day of June, 2025.